Hong Kong Liquidity Risk

http://www.bbc.co.uk/news/business-29406712 The protests in Hong Kong come at a time when Banks and Trading Houses are determining strategies and budgets for the forthcoming year, and bonus discussions move into a final phase. There is therefore a strong incentive for traders to cut exposure to the market to protect their compensation for the year. As houses will likely find themselves making towards the exits at the same time, volatility will increase as liquidity is limited. We expect that Market Risk Managers will pay close attention to house delta, gamma and vega exposure, however, they must ask themselves what line of sight do they have over alterations to the static data underlying the risk reports they compile? Great challenge also resides in the areas of Product Control and Independent Price Verification. If traders find themselves unable to physically reduce exposure, the temptation will exist to adjust static data to give the impression of reduced exposure. Input Volatilities, Credit Spreads, Dividend Yields all represent subjective risk inputs to the model. Reduced liquidity also creates problems for control staff performing price testing. Product Controllers should be asking where does this mark come from? Does the mark reconcile to other instruments within the bank?